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John Moffat.
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Nikitagarwal
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Que –
Short O’Funds has capital of $95,000 available for investment in the forthcoming period. The directors
decide to consider projects P, Q and R only. They wish to invest only in whole projects, but surplus funds
can be invested. Which combination of projects will produce the highest NPV at a cost of capital of 20%?
Investment Present value of
Project required inflows at 20%
$’000 $’000
P 40 56.5
Q 50 67.0
R 30 48.8
My ques – how did they calculate the NPV as no. of the years is not mentioned?
John Moffat
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You cannot calculate the NPV’s because there is not enough information. However you are not required to calculate them – they are given in the question.
Your job is to apply capital rationing techniques (as explained in my free lectures) to the information given in order to decide which combination of projects is the best.
Nikitagarwal
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Yes sir I have seen those lectures but in the below answer there is a 3rd column of NPV , can you please make me understand that:
The investment combinations we need to consider are the various possible pairs of projects P, Q and R.
Required PV of NPV from
Projects investment inflows projects
$’000 $’000
P and Q 90 123.5 33.5
P and R 70 105.3 35.3
Q and R 80 115.8 35.8
The highest NPV will be achieved by undertaking projects Q and R and investing the unused funds of
$15,000 externally.
Now here we have PV and NPV both , how did they do that .John Moffat
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The NPV is the net present value, which is the present value of the inflows less the initial investment in the normal way.
Nikitagarwal
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